Fitch: Detroit Bankruptcy Plan ‘Hostile To Bondholders’

By Michael Aneiro

AP

Kevyn Orr, Detroit emergency manager and bondholder nemesis.

Rating agencies are weighing in today on Detroit’s latest bankruptcy exit plan, which the city filed with the court last Friday, and in a nutshell they’re saying bondholders could get screwed if the plan is approved, which could set a problematic precedent for other muni bondholders. First, here’s Fitch:

The plan not only classifies unlimited tax general obligation (ULTGO) bonds as ‘unsecured,’ but further degrades ULTGO value by giving other similarly classed ‘unsecured’ creditors preferential treatment, including unfunded pension and retiree healthcare liabilities. The city’s choice to treat ULTGO bonds as unsecured is particularly concerning, as they are backed by a separate property tax approved by the voters for the sole purpose of paying debt service on the bonds….

Fitch also finds troubling the city’s legal attempt to invalidate the certificate of participation (COP) debt, which would further skew the equitableness of the plan away from debtholders’ interests. The plan includes reducing COPs recovery to zero while remaining silent on whether or not the pension system, which benefited from the sale of the COPs, would return any of the borrowed assets. Fitch considers Detroit’s plan of adjustment to be hostile to GO bondholders. If this priority of creditors is upheld, Fitch expects that this disregard for the rights of bondholders will factor into higher borrowing costs for local issuers, and ultimately for local property taxpayers, in Michigan.

And here’s Moody’s:

The city’s workers and retirees are treated far better than GO and COP creditors. Pension recoveries range widely, from 66%-96% for already accrued benefits, but future benefits are cut much more substantially. Retiree health care benefits (OPEB) face much lower recoveries, but appear to be treated slightly better than GO creditors.

Litigation from GO creditors and other creditor groups is likely and the final court-approved plan could end looking much different from the city’s proposal. The possibility of cram down of the plan on creditors is possible.

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There are 2 comments

FEBRUARY 24, 2014 8:36 P.M.

jaywell wrote:

Why should this suggested plan be a surprise? The labor unions get up to 96% of what they want and the ordinary investors who were stupid enough to buy the general obligation bonds based on the promises of the 'law' get pennies on the dollar. You can hear the socialist response now--"its only fair." This is the same type of solution the Obama administration gave the bond holders of GM.

FEBRUARY 24, 2014 11:43 P.M.

Losing my Retirement wrote:

It is extremely unfortunate and unfair that pension holders get treated so handsomely (66-96%) at the expense of the expense of everyone else. Everyone else in this case is tax-payers who will need to foot the bill, as well as their children who will face both higher taxes and reduced services. It also includes small investors seeking retirement income. I worked just as hard or harder to save the money I invested as gov't employees, Why should I only get 20% of what I was promised? What is the lesson for me - Shame on me for lending money to the government, or thinking that unlimited tax general obligation (ULTGO) municipal bonds were "secure"? I don't wish any ill-will to any employees, especially one who worked hard. However, many must have seen evidence of graft, fraud or waste and looked the other way - shame on them. Accountability needs to start somewhere, and I think it should start at the top, with the highest pensions getting hit the hardest.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.